Wednesday, August 19, 2015

No Green Ink Needed: Markets, Not Janet Yellen, Should Set Interest Rates

Richard Ebeling emails:

Dear Bob,

The National Center for Policy Analysis (NCPA) has published an article of mine on, “”Markets, Not Janet Yellen, Should Set Interest Rates.”

While world financial markets wait with baited breathe to find out when and by how much Janet Yellen and the other members of the Federal Reserve Board of Governors will start nudging up interest rates, there is one question that seems never to be asked: Should the Federal Reserve or the marketplace determine what interest rates should be?

Interest rates are like other prices, in having a crucial coordinating function in the market economy. Interest rates are supposed to balance the savings decisions of lenders with the borrowing desires of investors; they assure that real resources not devoted to more immediate consumption production are transferred and used for profitable future-oriented capital formation and production; and that investment decisions tend to be kept within the limits of the real resources available to complete and sustain them.

But Federal Reserve monetary expansions and interest rate manipulations potentially throw financial markets out of balance, and generate the boom and bust cycles of investment patterns inconsistent with savings choices by income-earners in the market.

Thus, the near zero-interest policy and nearly $4 trillion “quantitative easing” of expansion of money in the banking system by the Fed over the last six years is very likely setting the stage for another downturn at some point, as distortions and imbalances their own policies are causing finally rise to the surface.